• Actual numbers even more grim for 'health coaches' because Medifast leaves out of its 'average' associates who make $0 to $25 per month
• At top of the pyramid-style sales model for Medifast's Take Shape for Life, the median monthly pay for .02% of the sales force is a whopping $49,000
• Recruitment of 6,000 'health coaches' has fueled Medifast's rapid rise during the recession when other weight-loss companies have faltered
• The question remains: will this sales model, in which the majority of the sales forces makes little or no money and new recruits are crucial, continue to work?

By William Lobdell

Dr. AndersenIn a recruitment webinar now being used by the founders of Medifast’s (NYSE: MED) Take Shape for Life program, prospective “health coaches” are told about an extraordinary opportunity: by selling diet products and recruiting other citizen sales associates, they could—with some hard work—live an “entrepreneur’s fantasy” of incredible riches and oodles of free time.

Dan BellAnd even the "hard work" part for these independent sales people appears to be optional. Take Shape for Life co-founders Dr. Wayne Andersen and Dan Bell claim in the webinar that health coaches could put in as little as 30 to 60 minutes a day and still earn $35,000 annually.

“This is not pie in the sky,” said Dan Bell, a global director for Take Shape for Life, at one point during the roughly hour-long webinar. “This is not hype … this is the truth.”

A slide from Medifast promoters that shows how "health coaches" can allegedly make $35,000 annually by working 30 to 60 minutes a day.

This pitch, and others like it, have helped—during the recession—recruit an army of independent sales people. And in turn, Medifast has seen a rapid income growth and rise in its stock price during an economic dip that has decreased sales for its competitors in the diet industry. Those companies, such as Jenny Craig, NutriSystems and Weight Watchers that rely on traditional sales models, have found that consumers cut down on meal replacement and diet products when personal budgets are tightened.

But Medifast's stock rose 800% (from 4.24 to 33.23; it closed by 29.89 Monday) between the start of the second quarter 2009 and year end 2009 on soaring income increases generated by its health coaches, or independent sales people.

How did Medifast buck the industry trend during the recession and get 100% income increases in its Take Shape for Life program? The lure of riches generated by multi-level marketing.

Medifast claims now to have about 6,000 health coaches, about double the number from the year before. And in the webinar, Dan Bell predicted that the company will have an astonishing 80,000 health coaches by 2012.

Despite being an obvious multi-level marketing operation, as defined by the Federal Trade Commission and others, Medifast and Take Shape for Life officials work hard to avoid the label, perhaps in part because it might tip off investors that the company's recent sales increases would be difficult to maintain over time (and when jobs return to the economy) and also because some multi-level marketing efforts are often labeled pyramid schemes destine to collapse once the pool of new recruits dries up.

How financially successful are most "health coaches"?

Using Medifast's own figures for January to June 2009, you can see that behind the fanciful sales pitches to prospective health coaches and its growing independent sales force are weaknesses you'd expect to find in a rapidly expanding multi-level marketing sales operation. 

For instance, the monthly median check for more than 80% of active health coaches is less than $370 (this would barely cover the costs of Medifast's basic weight loss products for one person).

Worse, the median check for more than half of active health coaches is less than $78, meaning more than 50% of active health coaches are losing money if they purchase their own Medifast products (as encouraged) and market their business.

In the webinar, the promoters of Take Shape for Life also tell recruits that in two to five years, they could be making more than $25,000 a month. But in reality, 99.8% of the active health coaches have not reached the level where they are making $25,000 a month or more, according to Medifast figures.

And only .67% of the Take Shape for Life sales force take home a median check of more than $12,000 month. 

Promoters tell potential recruits that the average monthly check for an executive director, seven rungs up the sales ladder, is $3,200. What they don't reveal is that nearly 90% of active health coaches (this doesn't take into account everyone who has signed up for the sales program) haven't made it to the executive director level.

In the webinar, Bell and Andersen use two hypothetical income examples, one with a health coach earning $56,000 annually and another with a health coach earning $112,000 annually. Neither Bell and Andersen disclose that just 4.25% of active health coaches are at a level where the median monthly check would come close to an annual income of $56,000. And 1.25% of the active health coaches are at the level where the media monthly check would translate into an income of about $112,000.

The actual income figures for health coaches are even more grim because Medifast, in its public figures, leaves out of its "average" associates who make $0 to $25 per month, leaving the obvious question to prospective health coaches and investors: Why?

In the webinar, Dan Bell assured prospects that Medifast has a "very low" attrition rate of health coaches. This despite the fact that more than 50% of Medifast's active coaches earn less than $100 per month, according to company figures.

Most multi-level marketing companies have an attrition rate of 50-70%, according to Robert L. FitzPatrick, an author and expert on multi-level marketing.

Meanwhile, at the top of the pyramid-style sales chain, the median monthly check for Take Shape for Life global directors such as Dan Bell, who account for just .2% of active coaches, is more than $49,000. That translates into an annual income of $588,000. Medifast does not release the percentage of the income of global directors--or other levels of health coaches--that comes from retail sales versus overrides and bonuses from sales people in their network. Again, why?

On his website, Dan Bell said he's developed the largest sales organization within Take Shape for Life. The largest monthly income for a Take Shape for Life global director between January and June 2009 was $116,000, which would translate to an annual salary of nearly $1.4 million.

In FitzPatrick's report commissioned by the Fraud Discovery Institute, he concluded that:

Medifast should now be properly described not as a diet or meal replacement company, but rather as a multi-level marketing scheme that primarily markets a “business opportunity.”

... Effectively, the pyramid selling scheme based on the lure of income to consumers from an endless recruiting chain, is being leveraged into the securities market. 

In February, soon after FitzPatrick's report was released, Medifast filed a $270 million lawsuit against the Fraud Discovery Institute and FitzPatrick, and William Lobdell and others who published the findings of the research.

'We are not multi-level marketing in any form'

Medifast officials avoid the term multi-level marketing when describing its Take Shape for Life business model. On a website called the "Health Coach Training Center," there's a link to a document titled, "Why We Are Not a MLM [multi-level marketer]." The link is broken, but a copy of the document that bears Dan Bell's signature has been cached on the Internet. 

Here is some Bell's advice to health coaches on how they can shake the multi-level marketing label while recruiting others to sell for Medifast:

It is up to us to “frame” our business to potential HCs [health coaches] or HCPs [heath coach prospects?] so they are not left with the perception that we are in some way a Network Marketing or Multi-level Marketing business ...

Obviously we are not multi-level marketing in any form (hybrid or not). To even be compared to those businesses really drives me crazy. I am not tying to parse words or be cute like calling a car a jet when it indeed is a car.  But, we are very different from those kinds of businesses. (We are not in even in the same genus, let alone species!) 

So, let me share how I like to “frame” it: 

We are a professional health services company.

... We are client focused and not recruiting (of HCs) focused. This is a big distinction between us and MLMs.

... Here is suggestion to add to your repertoire the next time someone says something off the wall like this is an MLM … 

... Simply say to them in an incredulous way, “What in the world gave you that idea? Is that what you think this is? (and subtly laugh) Oh, that’s too funny… well, I guess I haven’t done a very good job at explaining what it is that we actually do if you think THAT we are an MLM! Let me tell you EXACTLY what we are. We are a professional health services company…etc.” 

Once you get someone to understand that we are teaching people how to first lose weight and then second how to live the BeSlim lifestyle, there is no way a person could think this is an MLM. 

FritzPatrick's illustration of Medifast's Take Shape for Life sales model.

FitzPatrick, among several critics, claims the sales program behind Medifast's Take Shape for Life program "manifestly meets the pyramid definition" because of these characteristics:

Gaining a position on the Take Shape for Life pyramid pay plan requires a payment of between $100 and $300. Each coach would also purchase ... marketing materials and possibly attend the TSFL annual convention, with a registration fee of $250 plus all travel and accommodation costs. 

The coach likely purchases the TSFL meal replacement diet products which cost approximately $300 per month. 

The new salesperson is lured with claims and testimony of high income potential of $8,000 to $25,000 or more. 

The pay plan pays far more – per sale – to those who recruit other coaches than to those who actually sell products to consumers, and the greatest share of all commissions is transferred to those in the top positions of the pyramid. 

The pay plan leverages 10 expanding levels of coaches on a five-recruit-25-recruit-125, etc. plan.

Bonuses are nakedly paid up front for recruiting new coaches. [The Federal Trade Commission warns: "Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They're actually illegal pyramid schemes."]

Every new coach is authorized to recruit others, with no limit and no control on  saturation. Each coach is offered financial rewards to expand the number of “competitor” salespeople!

Medifast graphic that shows how you can gain more income by recruiting "health coaches" than by selling products.

The Federal Trade Commission's definition of a multi-level marketing company is one that:

distributes products through a network of distributors who earn income from their own retail sales of the product and from retail sales made by the distributors’ direct and indirect recruits. Because they earn a commission from the sales their recruits make, each member in the MLM network has an incentive to continue recruiting additional sales representatives into their “down lines.”

Though Medifast fits the Federal Trade Commission's definition of a multi-level marketing company, the company refers to its Take Shape for Life sales model as only "direct selling."

Whether Medifast needs to disclose it's a multi-level marketing company to prospective independent sales people and investors is a matter of the Securities and Exchange Commission. According to SEC regulations, it's illegal ... "to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading ..."

Disclosure: After reporting the facts in this article, William Lobdell has taken a short position in Medifast. All information obtained for this story is public record. Finally, Lobdell has been named as a defendant in a lawsuit filed by Medifast.